In the United States, companies can maintain two separate sets of books for financial and tax purposes. Since financial and tax accounting rules differ, temporary differences can arise between the two books. This can result in a 澳洲幸运5官方开奖结果体彩网:deferred tax liability, which is when a company owes less in taxes now but expects to pay more in the future. Deferred tax liability commonly arises when there are differences between financial and tax accounting in the timing of recognizing revenue, valuing 澳洲幸运5官方开奖结果体彩网:inventories, or depreciating 澳洲幸运5官方开奖结果体彩网:fixed assets.

Differences in tax liabilities are simply temporary imbalances between a reported income amount and its 澳洲幸运5官方开奖结果体彩网:tax basis. Accounting disparities appear when there are differences between 澳洲幸运5官方开奖结果体彩网:taxable income and澳洲幸运5官方开奖结果体彩网: pretax financial income or when the bases of assets or 澳洲幸运5官方开奖结果体彩网:liabilities differ for financial accounting and tax purposes. For example, money due on current 澳洲幸运5官方开奖结果体彩网:accounts receivable (AR) can't be taxed until collection is actually made, but the sal🦩e needs to be reported in the current period.

Because these differences are temporary, and a company expects to settle its tax liability (and pay increased taxes)ꦍ in the future, it records a deferred tax liability. In other words, a deferred tax liability is recognized in the current period for the taxes payable in future periods.

Deferred Tax Liability Examples

Depreciation

One common situation that gives rise to deferred tax liability is the depreciation of fixed assets. Tax laws allow for the 澳洲幸运5💝官方开奖结果体彩网:modified a꧑ccelerated cost recovery system (MACRS) depreciation method, while most companies use the 澳洲幸运5官方开奖结果体彩网:straight-line depreciation method for financial reporting.

Deferred tax liability is calculated by finding the difference between the company's taxable income and its account earnings before taxes, then multiplying that by its expected tax rate. Consider a company with a 30% tax rate that depreciates an asset worth $10,000 澳洲幸运5官方开奖结果体彩网:placed-in-service in 2015 over 10 years. In the second year, the company records $1,000 of straight-line depreciation in its financial books and $1,800 MACRS depreciation in its tax books. The $800 difference represents a temporary discrepancy, that will reverse by year 10, leading to higher taxes later. The company, therefore, records a deferred tax liability of $240 ($800 × 30%) on its 澳洲幸运5官方开奖结果体彩网:financial statements.

Revenue Recognition

澳洲幸运5官方开奖结果体彩网:Revenue recognition differences also lead to deferred tax liability. Consider a company with a 30% tax rate that sells a product worth $10,000, but receives payments from its customer on an 澳洲幸运5官方开奖结果体彩网:installment basis over the next five years—$2,000 annually. For financial accounting purposes, the company recognizes the entire $10,000 revenue at the time of the sale, while it records only $2,000 based on the installment method for tax purposes. This creates an $8,000 temporary difference that the company expects to 澳洲幸运5官方开奖结果体彩网:liquidate within the next five years, leadi🦂ng the company to record a deferred tax liability of $2,400 ($8,000 × 30%).

Inventory Valuation

Another source of deferred tax liabilities is inventory valuation methods. The U.S. tax code allows companies to value their inventories based on the 澳洲幸运5官方开奖结果体彩网:last-in-first-out (LIFO) method, while some companies choose the 澳洲幸运5官方开奖结果体彩网:first-in-first-out (FIFO) method for financial reporting. During periods of rising costs or when inventory turnover is slow, temporary differences between tax and financial books arise, resulting in deferred tax liability.

Consider an oil company with a 30% tax rate that produced 1,000 barrels of oil for $10 per barrel in year one. In year two, due to rising 澳洲幸运5官方开奖结果体彩网:labor costs, the company produced 1,000 barr🍷els of oil for $15 per barrel. If the company sells 1,000 barrels of oil in year two, it records a cost of $10,000 under FIFO for financial purposes and $15,000 under LIFO for tax purposes. The $5,000 temporary difference gives rise to a deferred tax liability of $1,500 ($5,000🎃 × 30%).

Recognition and De-recognition

A deferred tax position can only be recognized if the future taxes payable event is more likely than not to occur. When recognized, deferred tax liabilities can be treated as equities or liabilities. Equity classifications typically result from the company using 澳洲幸运5官方开奖结果体彩网:accelerated depreciation for tax purposes, while using a differ⛄ent method for financial reporting, such as straight-line depreciation.

If the deferred tax liability no longer meets the "more likely than not" threshold, the company must reverse the previously recognized 澳洲幸运5官方开奖结果体彩网:deferment and reflect this change in the earliest applicable reporting period. When this reversal significantly impacts the company’s 澳洲幸运5官方开奖结果体彩网:profit and loss (P&L) stateme𒈔nt or the 澳洲幸运5官方开奖结果体彩网:income statement, a write-down may be necessary to correct prior financial statements, ensuring accurate 🌜rep♕resentation of the company's financial position.

The Bottom Line

Deferred tax liabilities are not due to the underpayment of taxes, but rather arise from timing differences between when income or expenses are recognized in financial statemenꦓts and when they are recognized for tax purposes. 

These liabilities are often due to differences in depreciation, revenue recognition, and inventory valuation methods. While they lead to lower tax payments now, they must be settled in the future as these timing differences reverse. Ultimately, a business needs to understand deferred tax liabilities to plan for potential future tax impacts, and to maintain accurate financial reporting. It's best to consult with a tax professional or a financial advisor for more specific guidance.